0

Assignment A2

Student name / BTEC Registration

THE UNIVERSITY OF DANANG Number
UNIVERSITY OF Truong
ECONOMICS
Thai Bao/Oliver HH43429
CENTER FOR INTERNATIONAL EDUCATION
 1

Contents
I. Task A:............................................................................................................. 2
1. Explain how budget can be a decision-making tool for businesses..........2
2. Prepare a budgeted income statement for Printer Rite Ltd.......................3
II. Task B:.............................................................................................................. 5
III. Task D:.......................................................................................................... 8
 2

I. Task A:
1. Explain how budget can be a decision-making tool
for businesses.
Budgeting is the process of creating a plan to spend your money.
This spending plan is called a budget. Creating this spending plan
allows you to determine in advance whether you will have enough
money to do the things you need to do or would like to do. (my
money coach). In addition, budgets are an important source of
information. They provide a system for ensuring communication,
co-ordination and control within an organization (BPP, 180).
Therefore, budget is seen as decision-making tool for business. The
management can base on the budget to offer decisions for their
objectives. Through budget planning and control, the manager is
forced to look ahead and predict what will happen in the future to
propose decisions and detail plans for each department to deal with
problems if they happen (BPP,180). In addition, the budget
planning and control system also helps communicate ideas and
plans. It means that the budget planning and control system will
help people aware what are obligations they must to do. In
addition, communication might be one-way, with managers giving
orders to subordinates, or there might be a two-way dialogue and
exchange of ideas (BPP, 180). Moreover, they also help co-ordinate
activities to combine different department together. Therefore, all
of people can direct their efforts to the common goals (BPP, 181).
Furthermore, providing a framework for responsibility also is one of
objective of the budget planning and control system. This will help
managers more aware of their responsibilities to achieve budget
targets for operations under their personal control (BPP,181).
Besides that, a system of monitoring and control are also
established. A budget is seen as a yardstick of actual performance
for measured and evaluated through comparison between actual
 3

results and the budget plan (BBP,181). Finally, the budget planning
and control system also helps employees have motivations to
improve their performance. Through system of feedback of actual
result, the management can monitor the performance of work well
or badly; from that, they will decide who can be retained.
Furthermore, the identification of controllable reasons departures
from budget gives the managers responsible an incentive for
improved future performance. (BPP, 181).
Two level of attainment can be set: (BPP, 181):
A minimum expectations budget
A desired standards budget which provides some sort of
challenge to employees.
2. Prepare a budgeted income statement for Printer
Rite Ltd.
Sale Budget:

Sales Budget = Number of unit sold Price/ unit

= 10.000 x 100 = 1000000

Total sales for the whole year: 1000000

Production budget:

The formula of production budget:

Planned production in units = Expected sales in units +

Planned ending inventory in units - Beginning inventory in
units
 4

Production budget of Printing Rite Ltd:

Planned ending inventory:

PR are in stock: 52,000 x 10% = 5,200

Raw material P: 13,500 x 10% = 1,350

Raw materials R: 48,000 x 10% = 4,800

Beginning inventory:

PR are in stock: 800 units.

Raw material P: 4500 units.

Raw materials R: 12,000 units.

Production budget:

PR are in stock Raw material P Raw materials R Year

Expected
sales in 52,000 13,500 48,000 113,500
units
Add:
Planned
ending 5,200 1,350 4,800 11,350
inventory
in units
Less:
Beginning
800 4500 12,000 17,300
inventory in
units
Planned
productio 56,400 10,350 40,800 107,550
n in units
 5

II. Task B:
While breaking even might not seem like much of a business goal, its
an important reference for your financial people. Your break-even
points provide important benchmarks for long-term planning.
Knowing your break-even for areas such as sales, production,
operations and investment payback can help you with pricing, debt
service and other functions of operating your business.

Break Even
A break-even point occurs when your revenues cover your expenses.
For example, if it costs you $4 in materials, labor and other direct
costs to make a widget, your break-even point for manufacturing
1,000 widgets is $4,000, or $4 per widget. This does not cover your
overhead costs, which are indirect expenses such as rent, insurance,
marketing and phones. Your overhead costs to run your business
might be $100,000, or $10 per widget if you make 1,000 widgets. Your
break-even point to make and sell 1,000 widgets is $14,000, or $14 per
widget. If you cover your costs for overhead and manufacturing, you
break even on your operations, but you might still have start-up
expenses you havent paid, and you havent broken even in terms of
recovering your initial investment. If you have $20,000 in start-up
debt and want to pay that off in two years, you must add $10 per
widget if you will sell 2,000 widgets over two years. Your break-even
selling point for the first two years is $24 per widget. After that, your
break-even point drops to $14 per widget. Knowing this, you might
change your investment payback to a three-year period, if you cant be
competitive at $24 per widget.

Fixed vs. Variable Costs

 6

Some costs increase as your sales increase, such as materials,

production labor and shipping. These are variable costs. Some
expenses dont increase or decrease with sales, such as your rent.
These are fixed costs. If you have $1,000 per month in rent, this
expense stays the same no matter how many units you sell; however,
their expense per unit changes with sales. If you sell 1,000 widgets,
your rent cost is $1 per widget. If you sell 2,000 widgets, your rent
contribution is 50 cents per unit. Knowing your fixed and variable
costs per unit, based on the number of units you estimate you will
sell, will help you determine your break-even point and pricing needs.

Price-Setting Implications
Once you know your various break-even points, you can set your long-
term pricing strategies. For example, once you have paid off your
initial investment, you can keep your prices the same, making more
profits per widget, or you can lower your prices, since you no longer
have to pay off your investment debt. Lowering prices might result in
more sales, bringing you more total, or gross, profits, even though
your profit per widget is lower.

Marketing Considerations
Each time you consider a sale or discount, calculate your break-even
points to determine if you can still make money at that price. If you
spend money on a marketing promotion, you can determine whether
its worthwhile by adding the cost of the promotion to your current
overhead expense for the time period the promotion is running to
determine your new break-even point. Or, you can divide the cost of
the promotion by the additional number of units the promotion
generated in sales and apply that cost to your overhead cost per unit
for those additional units.
 7

Financial Strategies
There is more than one way to reach break-even. You might increase
your sales, raise your prices to increase your profit margins, lower your
profits to generate more gross profits or reduce expenses. You can
reduce expenses through cost-cutting measures, depreciating assets,
reducing interest-bearing debt or investing excess cash to generate
capital gains on that money. Knowing your break-even points will let
you see the effects these different strategies have.

Investment Implications
Potential investors not only want to know the potential return on
their investments, they also want to know when they will see that
return. Some companies take years before they are profitable. In some
scenarios, the business might lose money during the first year or
several years before breaking even from operations. When the
company is profitable based on its operations, it wont need any more
investment money or cash reserves to continue operating. However,
even after it is profitable from operations, the company might still
carry significant investment money it needs to pay back using its
profits after operations. Therefore, the company has not made a profit
for its investors. Investors will want your break-even points in your
business plan to determine if they are interested in your opportunity.
 8

III. Task D:
a. The answer should be focused on using the current and quick
ratios. While the current ratio has steadily increased, it is to be noted
that the liquidity has not resulted from the most liquid assets as the
CEO proposes. Instead, from the quick ratio one could note that the
increase in liquidity is caused by an increase in inventories. For a
fresh food firm one could argue that inventories are relatively liquid
when compared to other industries. Also, given the information, the
industry-benchmark can be used to derive that the firm's quick ratio
is very similar to the industry level and that the current ratio is
indeed slightly higher - again, this seems to come from inventories.

b. Inventory turnover, days sales in receivables, and the total asset

turnover ratio are to be mentioned here. Inventory turnover has
increased over time and is now above the industry average. This is
good - especially given the fresh food nature of the firm's industry. In
1999 it means for example that every 365/62.65 = 5.9 days the firm is
able to sell its inventories as opposed to the industry average of 6.9
days. Days' sales in receivables has gone down over time, but is still
better than the industry average. So, while they are able to turn
inventories around quickly, they seem to have more trouble
collecting on these sales, although they are doing better than the
industry. Finally, total asset turnover is went down over time, but it is
still higher than the industry average. It does tell us something about
a potential problem in the firm's long term investments, but again,
they are still doing better than the industry.